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Disclosure initiative

Date recorded:

IFRS 13 Disclosure Objectives (Agenda Paper 11A)

Back­ground

At its July 2018 meeting, the Board selected IFRS 13 as one of two Standards on which to test the draft guidance on developing and drafting disclosure objectives and requirements in future. Applying Step 1 of the draft guidance, the Board has tentatively decided to:

  • a) use specific disclosure objectives, supplemented by items of information that an entity could disclose in order to meet those objectives.
  • b) use high-level catch-all disclosure objectives.

Staff analysis

The staff analysed each user information need and, for each item, made a recommendation as to whether, and how, that information need should be incorporated as a disclosure objective in IFRS 13. The staff analysis included a consideration of:

  • a) user feedback about how critical the information need is and why.
  • b) feedback from other stakeholders, including cost-benefit considerations.
  • c) the findings from the PIR of IFRS 13 regarding the usefulness of fair value measurement disclosures.
  • d) the objective of general purpose financial statements and the information provided by such statements as described in the Conceptual Framework.

Staff recommendations

Based on their analysis, the staff recommended the inclusion of a high level catch-all disclosure objective in IFRS 13 requiring an entity to:

  • 1. disclose information that enables users to evaluate an entity’s exposure to risks and impact on the financial statements associated with its fair value measurements of assets, liabilities and an entity’s own equity instruments.
  • 2. consider the level of detail necessary to satisfy the specific disclosure objectives and to ensure that any useful information about the entity’s fair value measurements is not obscured by a large amount of insignificant detail.

Further, the staff recommended that the Board include the following specific disclosure objectives in IFRS 13:

  • 3. An entity shall disclose information that enables users to understand the amount, nature and other characteristics as well as categorisation of the specific assets, liabilities and entity’s own equity instruments within each level of the fair value hierarchy and assess the effect fair value measurements have on the financial statements.
  • 4. An entity shall disclose information that enables users to understand the significant techniques and inputs used in deriving its fair value measurements, in order to assess the associated measurement uncertainties.
  • 5. An entity shall disclose information that enables users to understand the drivers of changes in the fair value measurements from the beginning of a reporting period to the end of that period, in order to evaluate how the entity’s fair value measurements are affected by significant transactions and other events during the period.
  • 6. An entity shall disclose information that enables users to understand the range of reasonably possible fair values for the assets, liabilities and entity’s own equity instruments measured at fair value, in order to evaluate the possible effects of fair value measurements on the financial statements and cash flows.

Finally, the staff recommended that the Board:

  • 7. does not develop a disclosure objective to explicitly address user needs about forecasting future fair value movements, as the information need is about equipping users with information to help them predict for themselves how exposure to fair value might affect the entity in future periods.
  • 8. require an entity that discloses fair value for assets and liabilities not measured at fair value in the statement of financial position to comply with recommendation 3.

Board discussion

Recommendation 3

Board members broadly agreed with the direction of the specific disclosure objective requiring an entity to disclose information that enables users to understand the amount, nature and other characteristics as well as categorisation of the specific assets, liabilities and entity’s own equity instruments within each level of the fair value hierarchy. However, some raised concerns that based on the way the disclosure objective is currently phrased, the level of information required to be disclosed was too granular and might not be realistic, particularly for regulated entities, such as big banks. These Board members proposed to communicate more clearly the purpose and focus of the disclosure objective as well as clarifying that assets, liabilities and equity instruments should be considered on an aggregate (grouped based on similar characteristics) rather than individual basis.  Others proposed that good practice examples from actual financial statements are considered.

The Vice-Chair highlighted that the requirements of the disclosure objective should be clarified and gain feedback as to how feasible it is.

One Board member asked whether these specific disclosure objectives will be helpful for an investor accessing the relevant information electronically. Other members argued that even having a lot of disclosure information in the financials should not pose an issue with electronic access, as users can access it more easily. It was agreed that new ways of presentation and use of the relevant information may need to be considered.

13/14 Board members voted in favour of the staff recommendation.

Recommendations 4 & 5

Board members broadly agreed with the staff recommendation. One Board member asked why the period included was limited to the reporting period. The staff replied that this is because it provides a concrete basis in terms of explaining these drivers to users, whereas a more general discussion might be more difficult for them to link to effects in the financial statements.

Another Board member questioned why the term ‘significant’ rather than ‘material’ was used to describe the techniques and inputs as opposed to what has been proposed for accounting policies. The staff noted that the two circumstances are different and given that in the context of IFRS 13 there is usually a finite number of judgements in relation to the techniques/inputs used, the term ‘significant’ has been deemed more useful to distinguish between them.

A Board member sought clarification as to whether the objective is referring to the most significant techniques and inputs or techniques and inputs for the most significant items. The staff confirmed that the objective is referring to the techniques and inputs with the most significant impact on the financial statements.

One Board member noted that the disclosure requirements of this objective might also be challenging in practice and proposed that this type of disclosure is tested with a big bank in order to assess whether it is practical.

14/14 Board members voted in favour of the staff recommendation.

Recommendation 8

One Board member raised the concern that the reference to recommendation 3 is confusing, as, contrary to recommendation 3, recommendation 8 relates to items not measured at fair value. The staff acknowledged the concern, confirmed that recommendation 8 relates to items not measured at fair value on the balance sheet but for which fair value disclosure is required and noted this feedback will be taken into consideration.  

Another Board member argued that there might not be sufficient reason for an entity to undertake the associated cost of the relevant disclosures for these type of items. Board members also discussed that the user needs in relation to fair value disclosures will be varied across different industries. The staff noted that explaining the nature and characteristics of these items helps users understand what the fair value is representing and whether there are any further concerns they may need to consider. They also pointed out that the purpose of the proposed disclosures is to show preparers the information that users need as well as explain why that is helpful to them and no significant new requirements are expected as a result of the discussed objective.

The Vice-Chair noted that it would be useful to understand how these requirements map to IFRS 13 so that it is clear which of these are incremental and which are not.

10 Board members voted in favour of the staff recommendation.

Recommendation 6

Board members broadly agreed with the staff recommendation.

One Board member questioned what constitutes ‘reasonably possible’ and what percentage this might represent. The staff noted that this has not been quantified and the Board member proposed that relevant guidance is drafted.

Another Board member asked whether there should be some interaction between IFRS 13 and IFRS 7 in relation to sensitivity analysis. Other Board members argued that there are different types of disclosures with different objectives under IFRS 13 and IFRS 7 respectively, a view also supported by the staff. 

13 Board members voted in favour of the staff recommendation.

Recommendation 7

There was no discussion in relation to this recommendation.

13 Board members voted in favour of the staff recommendation, 1 Board member was absent.

Recommendations 1 & 2

There was a debate around the use of the term ‘risks’ as opposed to ‘uncertainties’ in the high level catch-all disclosure objective, as some Board members were concerned that the term ‘risks’ implies a much broader population. The Vice-Chair also highlighted that using the term ‘risk’ may not clearly communicate the purpose of the objective, as it is too broad and imprecise.

The staff initially noted that the term ‘risk’ was consistently used by investors, however acknowledged the concerns raised.

Another Board member suggested that it would be useful to add a reminder in the objective that the concept of materiality still applies, as this may be helpful for readers.

One Board member raised a concern that including a catch-all disclosure objective may prove challenging especially for regulated industries, as users of the accounts may be using it with hindsight. It was argued by other Board members that the catch-all disclosure is rather meant to ultimately act as a guide to the preparers, whilst the staff confirmed that the purpose of the catch-all disclosure is to highlight the big picture and ensure any wider uncertainties users are concerned about will be captured.

There was also discussion around whether positioning the high level catch-all disclosure objective ahead of the specific disclosure objectives and clarifying that its intended use is to help an entity highlight any particular parameters that might be material but unique to it (and, hence, not captured by specific disclosure objectives) may be beneficial for preparers of the accounts. The staff noted that they are open to suggestions regarding the positioning of the objective.

10 Board members voted in favour of the staff recommendation.

Correction list for hyphenation

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